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Unbanked and more – Brookings

The $100 billion size of the high-cost
non-bank basic financial services industry, including check
cashers, payday lenders, and pawnshops, points to the high demand
for basic financial services among low- and moderate-income
customers. Alternative products sold by banks could meet those
consumer needs, while also creating an opportunity for households
to convert their current spending on high-cost services into
savings and even wealth. To explore that potential, this study
conducts a comprehensive review of the location of all basic retail
financial services firms to determine their accessibility to low-
and moderate-income consumers. The study also generates new
projections on the potential savings incurred by several scenarios
of hypothetical unbanked workers if efforts were made to transfer
their high-cost fees into savings or investment vehicles.

* Moderate- and lower-income households
pay over $8 billion in fees to non-bank checkcashing and short-term
loan providers to meet their basic financial services needs. Those
fees are collected from 48,082 non-bank establishments, which
include approximately 26,000 businesses that charge an estimated
average of $40 per payroll check to cash a check from typical
unbanked households with full-time workers.

* Over 90 percent of these non-bank basic
financial service providers are located within one mile of a bank
or credit union branch. For instance, 93 percent of non-bank
businesses that cash checks are located within one mile of a bank
or credit union branch.

* Despite popular perception, bank and
credit union branches are more likely to be located in low-income
and lower middle-income neighborhoods than non-bank financial
services providers. For instance, bank and credit union branches
are located in 56 percent of lowerincome neighborhoods; non-banks
are in 31 percent of lower-income neighborhoods.

* A full-time worker without a checking
account could potentially save as much as $40,000 during his career
by relying on a lower-cost checking account instead of
check-cashing services. Depending on types of checking accounts,
residence, money management skills, and account stability, this
same unbanked worker, assisted in transferring his savings into a
low-cost exchange-traded fund with a discount broker, could
generate as much as $360,000 in wealth over his 40-year career.

In sum, there is a substantial opportunity
to leverage this wide distribution of banks and credit unions to
connect moderate- and lower-income households to potentially
lower-cost basic financial services. Public and private leaders can
help moderate- and low-income households realize their full
wealth-building potential by working with the vast retail
infrastructure of banks and credit unions that are already
well-positioned geographically to provide affordable financial
services to these consumers. Further, by working together, the
public and private sectors can address the numerous business and
consumer dynamics that drive the supply of and demand for high-cost
financial services, and perhaps most importantly, confront what has
proved to be the very difficult task of promoting household savings
and investment.